Micro Blog #3: Is It A Good Idea To Buy A Stock After A Dividend Cut?

Should you buy or even hold a stock after it cuts its dividend?

Here is what happened to the five companies I was tracking after they cut/suspended their dividends: Only two out of five companies showed recovery in stock price.


A company that cuts a dividend, will likely cut it again or may even suspend it all together, if things continue to get worse. Examples: TEVA, MAT, WIN They have all suspended their dividends after the initial dividend cut.

When a company gets into trouble because of its own internal issues like MAT, WIN, and GE, the recovery could take much longer and may require drastic changes in management and capital allocation. The company may not even survive and have to be broken down or sold. I like to sell such companies as quickly as possible and move on.

But when a company cuts its dividend due to industry wide issues e.g. COP, TEVA then it's not an automatic sale. You have to look at whether a company can survive a downturn in its industry. Look at company's balance sheet and credit quality. How long the downturn is going to last, what are the industry experts saying?

Both COP and TEVA stocks have somewhat recovered. But since TEVA completely suspended its dividend, I would have sold the stock upon price recovery, whereas COP would've been a keeper.

When making a decision to sell on a recent dividend cut, ask yourself:

Is the company facing its own internal issues or industry wide issues?
Can I tolerate another dividend cut or even a suspension?
Am I willing to wait for the company to turnaround, even if it suspends its dividend all together?

These are the questions I would ask myself before making a decision to sell a company after a recent dividend cut.

Disclosure: I don't own any of the stocks mentioned in this post.
Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. Please do your own due diligence before buying any stocks. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer

Comments

  1. I usually head the other direction after there is a cut. Fortunately I've only had two stocks I think that have done this. But you make a good point about the difference between a cut due to a company's own failures vs industry wide downturns. Not every situation is the same.

    ReplyDelete
    Replies
    1. Yes DS, not every situation is the same but there are patterns of problems that fit in one category or another. By identifying those patterns of issues and bucketing them in the right category, one can steer clear of impending trouble.

      Thanks

      Delete
  2. The lesson I see here is that COP was effected by something they don't control, commodity prices. Companies like COP have their own inherent risk as it relates to commodities.

    The rest I see as being in lousy markets, executing poorly in good markets or a combination of both. Those issues tend to be management related. Bad management should be avoided as an investor.

    Tom

    ReplyDelete
    Replies
    1. Yes, too many examples of bad management these days and how they can take down once great companies. A good management can steer a company through any storm whether its commodity pricing issue or overall market rut.

      Thanks for stopping by and sharing your thoughts.

      Delete
  3. Great points. That is Finance 101 talking about risk. As you pointed out, there are different kind of risk. Systematic or industry specific and Unsystematic or firm specific risk. No one can control outside forces and as long as the company has good management and fundamentals, they should weather the storm. But when you get into the firm specific issues like credit rating, debt management, etc. If those are not tended to and monitored frequently it can go bad in a hurry and stay bad. Investors need to know each of these types of risks.

    ReplyDelete
    Replies
    1. I like your explanation from Finance 101 Daze :) Now, we just have to keep these learnings in mind when trading or investing in stocks.

      Thanks

      Delete
  4. I tend to avoid this by investing in ETFs :-) That being said I did have some GE stocks when dividend was cut. I decided to hold them. Think of it as a contrarian move. Then again it is a very small portion of my portfolio. Nice article Mr. ATM.

    ReplyDelete

Post a Comment

Popular posts from this blog

Building A City Of Dividend Stocks

My Dividend Radar

My Magic Heat Map Says: IBM Shares Ripe For Buying

My Dividend Paradise

How I am Protecting My Credit Report

A Stock Watchlist Makes A Better Investor

A Better Way to Build a Bond Ladder

It's Raining Dividends!